Trusts and Estates 101: From Those In The Know To Those Who Need To Know

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Changes To New York Estate And Gift Taxes-2014 and Beyond

Earlier this month, Governor Cuomo along with both houses of the New York State Legislature, enacted the most sweeping changes to the New York Estate and Gift Tax system in well over a decade. Some of these changes have already gone into effect while others will progressively be phased into how estates and trusts are taxed over the next few years.

Among the changes are the following:

1) A progressive increase in the state exclusion to ultimately index the New York exemption with the federal exemption by 2019. Beginning April 1, 2014, New York has increased its estate tax exclusion from $1,000,000.00 to $2,062,500. This will remain in effect until next April when the exemption will again increase. A full list of scheduled changes to the exemption is below:

04/01/14-03/31/15 $2,062,500

04/01/15-03/31/16 $3,125,000

04/01/16-3/31/17 $4,187,500

04/01/17-12/31/18 $5,250,000

From January 1, 2019 on, the state estate tax exemption will be indexed with the federal estate tax exemption every year subject to inflationary increases.

2) A phase out of the estate tax credit for estates valued at 105% or more of the applicable exemption. This change may cause many unintended results if not properly planned for. In short, estates that are above the applicable estate tax exemption but below 105% of the exemption, will be taxed on the portion of their estate above the exemption in effect the year of the death. However, for estates valued at 105% or more of the exemption, the ENTIRE ESTATE will be taxed! This change has been questioned by many planners and tax professionals, but until further guidance or changes are enacted by the legislature, it should be assumed that this was the intended result.

3) Inclusion of gifts made on or after April 1, 2014, but before January 1, 2019, within 3 years of decedent’s death in the decedent’s taxable estate. This change will limit the ability of taxpayers to make lifetime transfers during the final years of their life to avoid estate tax inclusion. While this provision has a limited time-frame, it may make certain gifting strategies less attractive from a tax avoidance perspective.

4) Income taxation of certain trust income from certain trusts. Under the new legislation, income payable to New York residents from exempt resident trusts will now be subject to income tax. Furthermore, income from incomplete non-grantor trusts will be included in the income of the grantor. Both of these changes are subject to certain dates with regard to when the income is received.

5) Creation of a New York Specific QTIP Election. Prior to the new legislation, an individual wishing to leave property to their spouse in a QTIP marital trust would be required to file a federal estate tax return to take advantage of this exclusion. The new legislature now allows New York residents to make a QTIP election specific to New York estate tax law without a corresponding federal election.

These changes come with several planning opportunities and pitfalls. First and foremost, with the changes to the state estate tax exemption, the difference between the state and federal exemptions will shrink and ultimately disappear. This makes the use of mandatory credit shelter trusts more attractive. Previously, the use of such a trust could cause state estate tax to possibly be due at the first spouse’s passing. Now, the bigger risk is failing to utilize both spouses full state exemption. Under federal law, a surviving spouse can ‘inherit’ the unused portion of their spouse’s exemption; under New York law, this is only possible by using a credit-shelter trust.

Second, given the significant taxation that becomes due once an estate exceeds 105% of the state estate exemption, individuals may wish to consider gifting a portion of their estates to a spouse, their children or making a charitable bequest.

Finally, for those individuals who are looking to make gifts over the next four and half years, it may be advisable to consider alternative gifting vehicles other than outright gifts.

It is likely that these changes will evolve during the next few years and clarifications will be made to certain provisions of the new legislation. For this very reason, the proper legal and tax advice is crucial to ensure that your estate is properly protected from excess taxation.